Globalisation

A2 Economics Presentation

2005

Key Issues

• The meaning of globalisation

• Factors driving globalisation

• Globalisation and developing countries

• Evaluation of the costs & benefits of globalisation

• How has globalisation affected the UK economy?

• Cost benefit analysis

What is Globalization?

• It is the increasing integration of the international economy

• Globalization has many dimensions:

– Deregulation of world product, capital and labour markets increasing financial and factor mobility and trade in goods and services

– An expansion of multi-national activity

– The increased freedom and capacity of individuals and firms to undertake economic transactions with residents of other countries and operate on a global scale

Further interpretations of globalisation

• Fundamental changes in economic geography – spatial division of different stages of production

– The geographical separation of manufacturing from research and development

– The expansion of “global sourcing” (out-sourcing)

• Increased specialisation in and faster shifts in comparative economic advantage between nations

• A reduction in the economic power of governments – e.g. to raise taxes

• Greater global economic interdependence

Key trends in globalisation

(a) Trade Integration (i.e. trade as a share of GDP)

(b) Globalisation of Capital Markets (bonds, shares)

(c) Globalisation of Production (multinational activity)

(d) Globalisation of Technology - international exploitation of technology; collaboration between businesses; generation of innovations across countries

(e) Regionalism - the growth of formal and informal trading blocs (NAFTA et al)

Regional Trading Blocs

Waves of Globalisation (1)

• Wave One:

– Began around 1870 and ended with the descent into global protectionism during the interwar period of the 1920s and 1930s.

– This period involved increases in the growth of trade driven by economic policies that liberalized flows of goods and people, and by emerging technology, which reduced transport costs

Waves of Globalisation (2)

• Wave Two:

– After 1945, there was a second wave of globalization built on a surge in world trade and reconstruction of the world economy

• Wave Three:

– The current wave of globalisation which is demonstrated for example by a sharp rise in the ratio of trade to GDP for many countries and secondly, a sustained increase in capital flows between counties and trade in goods and services

Waves of Globalization (3)

Factors behind expansion of trade

Fall in Sea Transport

Costs

Inc containerisation

Declining Air Freight Costs

Expansion of electronic

Data Exchange

Decline in tariff and non-

tariff restrictions

Rising Real Living

Standards

Liberalisation of Domestic

Markets

Growth of transnational companies

• Higher profits and market access

• Reduced technological barriers to movement of goods, services and factors of production

• Cost considerations – a desire to shift production to countries with lower unit labour costs

• Forward vertical integration (e.g. establishing production platforms in low cost countries)

• Avoidance of tariff and non-tariff barriers

• Desire to extend product life-cycles

Changes in product life cycles

Conventional

Vo

lum

e

Intro-duction Ramp-up Maturity

End of life

Development Dramaticend of life

Shorter time to market

Fas

t ra

mp

-up

Demand fluctuation

Higherpeak

New Digital Consumer

3-5 years 1 year

Source: Dr Tsugio Makimoto - Hitachi/Sony

Conventional

Vo

lum

e

Intro-duction Ramp-up Maturity

End of life

Development Dramaticend of life

Shorter time to market

Fas

t ra

mp

-up

Demand fluctuation

Higherpeak

New Digital Consumer

3-5 years 1 year

Source: Dr Tsugio Makimoto - Hitachi/Sony

Merchandise exports as % of GDP

1950 1973 1998

UK 11.3 14.0 25.0

Western Europe 9.4 20.9 29.7

USA 3.0 4.9 10.1

World 5.5 10.5 17.2

Total trade to GDP (per cent)

1910 1950 1995

UK 44 30 57

Germany 38 27 46

USA 11 9 24

Japan 30 19 17

Transformations of the global economy

• Transformation in relative economic power since the industrial revolution

• Early 19th century: rise of the UK

• Late 19th and early 20th centuries: rise of USA and Germany

• Post-second world war: Japanese miracle

• 1970 onwards: rise of the rest of Asia, including China and India

Global shifts

Global trade shifts

The debate over globalisation

• It’s an emotionally-charged word:

• Pro globalization view:

– On one hand, it represents the key to economic development by some

• Anti-globalization view:

– On the other hand, some people believe it is anti-development because it increases inequality, threatens employment and living standards, and thwarts social progress.

Costs and benefits of globalisation (1)

(a) The Orthodox Perspective – pro-Globalization

– There are important gains from trade through specialisation and comparative advantage

– Policy implications: Encourage free trade and market liberalisation

– Globalisation viewed as a positive sum game

– Positive link between growth of trade and the growth of world GDP

– Supporters point to the example of the “dynamic globalizers”• South Korea, Brazil, China, Hungary, India, Uganda, Vietnam

and Mexico• The more globalized developing countries saw their aggregate

per capita growth rate rise from 1 percent in the 1960s, to 3 percent in the 1970s, 4 percent in the 1980s and 5 percent in the 1990s

• Exports from developing countries as a whole accounted for 29 per cent of world trade in 2001.

The UK Treasury View

• International trade has been a major driver of global growth and prosperity over the last fifty years. As trade has expanded, global incomes have grown.

• Open economies have been able to harness the power of trade to boost competitiveness and productivity, helping improve living standards and sustain economic growth.

Costs and benefits of globalisation (2)

(b) The `Anti Globalisation’ Perspective

– Emphasises exploitation and global inequality and relative poverty• The richest country (the United States) has a real income per

head 70 times that of the poorest (Sierra Leone).• During the 20th century, global average per capita income rose

strongly but the distribution of income among countries has become more unequal than at the beginning of the century (IMF, World Economic Outlook, 2000)

– Fears over loss of cultural diversity – homogenization of culture and institutions (The spread of McDonald’s!)

– Spread of human trafficking

– Policy implications: Protectionism is justified, policy should encourage “localisation” rather than globalisation

A reduction in absolute poverty

Relative economic growth rates

US concerns!

Anti-globalisation protestors

Martin Wolf (FT)

• “If the critics were right, supporters of the global market economy would be in favour of mass poverty, grotesque inequality, destruction of state-provided welfare, infringement of national sovereignty, subversion of democracy, unbridled corporate power, environmental degradation, human rights abuses and much more.”

Africa’s marginalisation

• Many countries in sub-Saharan Africa have failed to share in the gains of globalization.

• Their exports still predominantly primary commodities.

• Why the failure?

• Mainly because of:

– (1) Poor policies and infrastructure, weak institutions and corrupt governance have marginalized these countries.

– (2) Geographical and climatic disadvantage have locked some countries out of global growth

Impact of globalization on UK

• Britain now exists increasingly in an ‘interconnected global economy’ (Tony Blair)

• Globalization is bringing about structural change for the UK

• Shifts in production

– Increased use of global outsourcing

– Rising import penetration from relatively cheaper manufactured products produced overseas

• Changing patterns of trade and investment

• UK transnational companies must seek to build a global trading platform in markets where they have advantage

– Exports of high and medium-high technology goods

– More trade in high-valued knowledge-based services

• Technological alliances between firms are becoming common

UK share of world trade in goodsUnited Kingdom, Shares in world exports of goods

Source: EcoWin

85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01 02 03 04

Perc

ent

3.00

3.25

3.50

3.75

4.00

4.25

4.50

4.75

5.00

5.25

5.50

5.75

6.00

Globalization influences

Cultural Influences

Social Influences

Changing nature of The nation state

Inter-connectedEconomic cycles

Financial markets

Labour markets

Export trends

0

5

10

15

20

25

1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001

Source: UN

UK

US

France

Japan

Germany

Italy

Canada

Exports of high and medium-high technology goodsG7 comparison, 1981-2002Per cent of total goods exports

Exports of knowledge based servicesG7 comparison, 1991-2001Per cent of total services exports

0

10

20

30

40

50

60

70

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001

UK

Japan

US

Germany

France

Italy

Canada

Source: IMF

Importance of knowledge-based services

Martin Wolf (Financial Times)

• I work for a publication that sells more than three-fifths of its copies outside what was once its home market. These copies are published on the same day in some twenty different places around the world. Fortunately, I am not limited to British cameras, computers and vegetables or to sightseeing and investing only in Britain. I, like the FT, am part of an internationally integrated economy.

Has globalisation benefited the UK?

UK remains favoured venue for

FDI inflows

Terms of trade have moved into the UK’s favour

Loss of comparative advantage

Threat of job losses because of

outsourcing

Risks of widening income and wealth

inequality

Economic growth has been sustained

Has globalisation helped the UK economy?

Further evaluative comments

• Many of the costs and benefits apply to other countries beside the UK

• Globalization is a cause of structural change – much depends on how a country responds to the challenges posed by this process

• Many of the effects will be long term

– Shifts in output and employment in manufacturing

– Emergence of new global technologies

• Competitiveness is a key concept in this debate